Forums  > Basics  > Pulling An Unsophisticated Market Maker In Before Hitting Their Bid/Ask  
     
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Mistro


Total Posts: 20
Joined: Aug 2018
 
Posted: 2019-08-14 02:04
I am trading in very illiquid options markets (TMX, ASX...) and I was wondering how I might be able to improve my fills. I saw Ronin post a recent comment - "If you are a liquidity taker, pull him in to improve his price and then hit him. It's nice that you get to find out what his best price is at zero cost to you. If it's not good enough, just sit back and wait until it gets better."

Currently, I am the majority of the options volume in a few of the single names.

An example. XYZ at the money options have a spread of 1.00 and 5.00, the "last" trade is very stale. I have fair value of the option marked at $1.80. However, the counter-party is not taking my bid @ 2.20.

Going off Ronin's example, should I put an offer to sell 50-100 contracts at the ask and then hit him with my bid?

Thanks in advance.

Ps. There are no cancellation fees

men lie, women lie, numbers don't

Kitno


Total Posts: 390
Joined: Mar 2005
 
Posted: 2019-08-14 11:41
It’s likely me being thick (as I am) but...I think you are mixing up hitting the bid and lifting the offer/ask. I can’t follow what you are writing.

Also, it’s not 2007 (sadly).

"Yeh, after that blow out I bid the bonds at 76 and you hit man...You're 77/81 now? Cool man...What? Do I care at 80? No mate... I'm 73 bid now...I'm sure you didn't just load up just for me...".

schmitty


Total Posts: 60
Joined: Jun 2006
 
Posted: 2019-08-14 23:11
If the MM is not jumping, or at least joining, your $2.20 bid, spoofing an offer won't do any good. Spoofing is aganst the rules anyway, at least in US options markets. Don't know if that is true re TMX/ASX.

If there are no cancel fees, you have an obvious execution strat. I'll pm you on this.

Mistro


Total Posts: 20
Joined: Aug 2018
 
Posted: 2019-08-15 03:07
Thanks schmitty I look forward to your answer. I'll try and provide a bit more color. Most of my trades are placed as spreads rather than individual legs. The TMX has an "Implied Order Book" which supposedly enhances spread liquidity. Here is a 1.5 page manual on how it works. https://m-x.ca/f_publications_en/implied_pricing_options_en.pdf It seems similar to the Complex Order Book (COB) in the US.

Additionally, if the bid/ask is a bit tighter, say 2.00/3.00 with 10 resting orders on the bid and 10 resting orders on the ask and I come in with a bid of 20 contracts for 2.50 the Ask will immediately move to 3.10. This only happens for certain equities.

The complete list of market makers for the TMX can be found here. It also shows what equities they cover. I find when a stock is covered by TD, the bid/ask are much tighter and the fills much closer to the Mid point. https://www.m-x.ca/f_publications_en/mainteneurs_marche_en.pdf. I am not too sure if knowing what market maker is sitting on the bid/ask can help me.


men lie, women lie, numbers don't

ronin


Total Posts: 471
Joined: May 2006
 
Posted: 2019-08-15 07:30
My comment was linked to a pretty specific situation where there is a dumb robot pinned to the best bid or best ask.

> However, the counter-party is not taking my bid @ 2.20.

So sue him. If he doesn't like your bid, he doesn't like it. You can't make him take it.

> I come in with a bid of 20 contracts for 2.50 the Ask will immediately move to 3.10.

Which sounds like great news if you want to get priority on the 3.00 Ask, no...?

But, like @schmitty says, spoofing is illegal. Not just theoretically. Ask Nav Sarao how it worked out for him. So I'd be very careful with this sort of thing.

"There is a SIX am?" -- Arthur

nikol


Total Posts: 752
Joined: Jun 2005
 
Posted: 2019-08-15 08:59
@Mistro - thank you for this "Basic" question. very interesting.

@shmitty - would you mind to share your ideas with me as well? I am working on cryptos. To avoid duplication we can setup mail-list or channel in telegram. For me no problem to discuss in narrower circle.

Mistro


Total Posts: 20
Joined: Aug 2018
 
Posted: 2019-08-16 00:53
Hi ronin, thanks for the reply,

>So sue him. If he doesn't like your bid, he doesn't like it. You can't make him take it.

Do you know any good lawyers?

> Which sounds like great news if you want to get priority on the 3.00 Ask, no...?

Would you mind elaborating a bit more about getting priority @ 3.00? My model has a fair value @ 1.80. The fair value is calculated by fitting a spline through the implied vols on the option chain. Why would I be excited about paying 3.00?

Are there any current legal strategies used for superior execution? Currently, if I am buying an option, I start 5% below "fair value" and start working my way up. I am sure I can do a lot better in finding liquidity.

I assume, the market maker has a fair value for the option price and then leaves a margin of safety. However, some of the spreads are 40 vol points wide. ie. 20%/60%. Is there a way to estimate what the market maker is willing to pay before placing the order? Is there also a way to get the market maker to reduce the amount of margin of safety needed for the trade?

men lie, women lie, numbers don't

Baltazar


Total Posts: 1771
Joined: Jul 2004
 
Posted: 2019-08-19 04:35
>Would you mind elaborating a bit more about getting priority @ 3.00?

You scare him to move to 3.1 and place your sell order at 3.0, you got priority.
Great place to be if the fair price is 1.8

Qui fait le malin tombe dans le ravin

ronin


Total Posts: 471
Joined: May 2006
 
Posted: 2019-08-20 12:55
> Do you know any good lawyers?

They are all busy chasing ambulances...

> Why would I be excited about paying 3.00?

You wouldnt. But you would be excited about receiving 3.00, as @Balthazar explained.

> Is there a way to estimate what the market maker is willing to pay before placing the order?

Not really. If something is as illiquid as this, you can safely put liquidity in and out to probe without serious risk of adverse fills. But that's about it.

> Is there also a way to get the market maker to reduce the amount of margin of safety needed for the trade?

Short of creating a liquid market in that and related contracts, so he has no reason to quote wide, no.

Sadly, if your strategy relies on getting reliably filled in an illiquid security at fair value plus epsilon<<1, it is dead in the water. As Ali G would put it (showing my age here), D-E-D. Dead.

"There is a SIX am?" -- Arthur

Mistro


Total Posts: 20
Joined: Aug 2018
 
Posted: 2019-08-20 17:46
In regards to priority, can the the market still trade through the spread or will the market maker have to show a better offer in order to get priority? As an example, if I have priority to sell @ $3.00 and I am the best visible offer, can a trade still occur at a lower price? Or will the market maker have to quote $2.95?

>Not really. If something is as illiquid as this, you can safely put liquidity in and out to probe without serious risk of adverse fills. But that's about it.

Thanks for the tip ronin. It seems like my strategy (maybe this is what schmitty is referring to) should be to probe with a 1 lot and once I find liquidity come in with my full order.


men lie, women lie, numbers don't

ronin


Total Posts: 471
Joined: May 2006
 
Posted: 2019-08-21 08:25
> if I have priority to sell @ $3.00 and I am the best visible offer, can a trade still occur at a lower price? Or will the market maker have to quote $2.95?

I think you are asking two different things here. 2.95 is lower than 3.00, and 2.95 would have priority over 3.00.

Options books have price-time priority. First priority goes by price (more aggressive gets filled first), then within each price level it goes by time (first come, first serve).

And lit orders have priority over dark orders. So a hidden order at 3.00 gets filled after all visible orders at 3.00, but before any orders at 3.01.

If you are the first to quote visibly at 3.00, the only way for somebody to get filled before you is to be more aggressive on price - e.g. quote 2.99 to your 3.00.

But that only works for DMA. If your broker internalises the flow, they can help themselves to any liquidity before passing it on to you. You have to check with them what they do and what their policy is.

> should be to probe with a 1 lot and once I find liquidity come in with my full order.

That's unlikely to work. And even if it does work once, it won't work more than once. If the liquidity isn't there, it isn't there.

A better way to do it woud be to look for cheaper proxies. Maybe you can get cheaper gamma from the index futures, maybe cheaper vega from the etfs, maybe delta from the underlying. And then worry about slippage.

"There is a SIX am?" -- Arthur

EspressoLover


Total Posts: 377
Joined: Jan 2015
 
Posted: 2019-08-21 16:38
Lots of good replies here, that I think have pretty much covered everything. I'll just add one more idea, that may or may not help.

You might try flashing your order on a periodic basis. E.g. say you're hoping to buy at $2.75, but the MM is sitting on the ask at $3.00. Submit a limit bid at $2.75, let it sit for 5ms, cancel, wait 50ms, repeat. Keep trying this for 20-100 cycles. The MM may be willing to meet you at $2.75, instead of his normal $3.00 reserve for two reasons:

1) It credibly signals that your order isn't trying to take advantage of some latency arbitrate. Since the order's arriving on periodic, predictable intervals, you're proving that the order isn't a direct response to events in other markets.

2) It credibly signals that you don't have a big inventory sitting behind the order. Because if you did, you'd be interested with interacting with as much liquidity as possible. Not just low-latency market makers. Therefore instead of cancelling the order after 5ms, you'd let it rest so that it interacts with the natural flow in the market.

Whether this works or not is completely dependent on whether the MM's bot is programmed to recognize the behavior. So, definitely can't tell you whether it will work in your case or not. But it's probably worth giving it a shot.

Good questions outrank easy answers. -Paul Samuelson
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